Why own a management lot?
09 Feb 2016
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We are definitely seeing more and more management rights businesses being created without the need to own a piece of real estate with them. This is particularly the case in new off the plan developments. Some of these are large enough to be purely standalone businesses, but most of them in smaller schemes seem to be designed to be able to operate on a standalone basis, but also as a ‘bolt on’ to an existing management rights business.
We have written previously about things you need to consider when thinking about separating your management lot from your management rights business here. The key theme there was flexibility in terms of your contractual obligations.
Being good jurists, now it is time for the opposing argument. Why own a management lot?
Leaving aside the financial issues (return on capital deployed etc, for which we are definitely not qualified to comment on), we think there are some very good reasons to own a lot in the building you have been engaged as manager of.
We have broken these down into what we think are four key categories.
You are part of the body corporate
- Owning a lot gives you a seat at every general meeting. Without a lot you are no different to what we as lawyers are to any body corporate - a provider of services who can only attend general meetings if invited or through a proxy from an owner. There is no automatic right to attend a general meeting otherwise.
- You have the right to submit motions for general meetings. If you do not own a lot you need to find an owner to lodge them for you, or you have to have the committee agree to do so. You are also then subject to the lodger's continued support i.e. they can withdraw their support for you and their motion).
- You get a vote at general meetings. In some buildings, every vote counts.
- As part of the body corporate you automatically get copies of every piece of information that gets sent from the body corporate to owners. This includes all committee meeting decisions and minutes, general meeting information and so on. Without that you have to rely on an owner to inform you. If they don’t send it on, you may not know a meeting has even been held.
- Market expectations still largely include an on-site residence component – as much as sometimes this is not a preference of buyers. We still transact far more management rights businesses with a lot than without. Lots of buyers still do want the home as well as the income.
- If the legislation changes to allow resident managers a voting role at committee level as a lot owner (see question 32 of the latest consultation paper), then you will have the right to nominate for committee. If you do not own a lot you will more than likely not be able to be on the committee in a voting capacity
- Your interests are more closely aligned with owners
- If the capital value of an owners unit falls, yours probably does so too. Likewise, if you increase the capital value of lots through good management, the capital value of your lot should rise too.
- The obligation to reside onsite and the obligation to own a lot are two completely separate things, but they often run parallel in management rights agreements. Owner’s expectations are usually for someone to reside onsite – particularly in larger complexes with significant body corporate remuneration. Being there after hours will create better relationships with owners who have issues.
- Banks have differential lending policies. It is safe to say that banks will usually lend more to businesses with a component of residential real estate and a related business, than to just a business alone. The security provided by real estate is always preferred by banks to just that of goodwill in a business. This potentially widens your buyer pool (particularly if you can add flexibility to your contractual arrangements).
- In circumstances where there is an obligation to reside onsite but there is no ownership of the lot there will be, rental costs, FBT, arguments over maintenance, mortgagee risk (through owner default) with subsequent loss of possession, tenure and other usual tenancy issues. Owning a lot means absolute security over the possession of the lot.
- You have some more flexibility about how you apportion the pricing of the overall purchase and eventual sale. Subject to how you are structured and your age, when you sell a management lot and business you can apportion the respective values to be more tax effective than if you have just the one asset.
If worst comes to worst
- Of critical importance is the ability to operate on site (from the lot or its related office space) if the management rights agreements come to an end. If you own a physical lot you:-
- are usually the first visible element of any building – meaning you control first impressions;
- can never lose the right to use that lot for that purpose. Short of you previously contractually agreeing to do so, a body corporate can never take your lot away from you. If the management rights agreements come to an end and the property used for business purposes is common property (like an occupation authority or an exclusive use space) the body corporate can take that back; and
- can still operate a rental business from your lot. This is then effectively a rent roll without the caretaking component and it will need a full real estate agents licence. That is then done without any interference from the body corporate. If that happened, for all intents and purposes you are then an outside agent operating onsite so far as it relates to your relationship with the body corporate.
- if the management rights agreements came to an end you are still an owner and can continue to lobby from inside the body corporate to get them back. If your rights with respect to the body corporate are only as a contractor, your entire relationship with the body corporate comes to an end with the ending of the management rights agreements. You are then an outsider looking inside the tent.
There is some merit to owning real estate despite its relative lower potential financial return. The middle ground is probably owning a lot but not having the obligation to reside onsite (which is now not required from a licencing perspective).
All these choices!